No coming event on the global political and economic calendar—even the U.S. presidential election—is more consequential than Britain’s historic referendum on its membership in the European Union. On June 23, U.K. citizens will decide if their nation will become the first member state to exit the EU in its 58-year history. Besides triggering a political crisis in London, an affirmative “Brexit” vote would cause an immense upheaval from Paris to Warsaw.
The departure of Britain’s $3 trillion economy would embolden the EU’s growing number of anti-euro parties—and mainstream voters—who view the EU’s grand plans for integration as a threat to their nations’ sovereignty. More and more nations could choose to defy Brussels and go their own way on immigration policy, fiscal targets, and business regulation, rendering the already troubled union even more fractured and dysfunctional.
And even though Britain isn’t a eurozone member, a Brexit could prove ominous for the single currency. To keep the euro alive, rich nations must fund cash grants and debt relief for struggling members like Greece. Winning the consensus needed for future bailouts will prove far more difficult if a Brexit stirs a greater push toward nationalism. “The major eurozone member states cannot agree now on what’s needed to pay for the smaller states,” says Anand Menon, professor of European politics at King’s College. “A Brexit will force them even further apart.”
Right now most polls predict a narrow win for what’s known as the “remain,” or stay in the EU, platform championed by Conservative Prime Minister David Cameron. If he notches a double-digit victory in June’s vote, it would strengthen his hand in setting U.K. domestic policy. But if Brexit succeeds, “he’d have to step down as Prime Minister, and the job would go to someone from the ‘leave’ camp, probably former London mayor Boris Johnson,” says Raoul Ruparel, co-director of Open Europe, a London think tank that’s neutral on the issue. Given Cameron’s role as a relentless champion for “remain,” even a close vote could force him from power or turn him into a lame duck.
As for Britain’s economy, a Brexit wouldn’t be nearly as damaging as the Cameron government—or the OECD and IMF—predicts. The EU imposes heavy duties on manufactured goods from outside the union and espouses a highly protectionist agricultural policy. Prices for everything from food to appliances to PCs are about 20% higher in Europe than on world markets. Freed from those barriers, the U.K. could lower prices for consumers by an estimated 8%. The U.K. would also escape around $9 billion in annual EU membership dues and potentially scrap costly labor and environmental regulations legislated from Brussels.
However, Brexit also carries big risks for the U.K. If it left the trading bloc, British manufacturers would be forced to pay heavy duties on the Jaguars and Cadbury chocolate bars they send to the EU, slowing exports to its biggest market. And it’s not at all certain that the British government would overcome labor union and voter opposition to shedding the EU’s expensive labor and green-energy regulations. The vote could lead to severely restricted immigration, which has greatly expanded the U.K. economy. Plus, investment would drop during a long period of uncertainty as the U.K. negotiated new trade agreements.
For the rest of Europe the fallout of a Brexit vote would be just as profound. Even if the stay supporters eke out a narrow victory, the sentiment stirred by the vote could stiffen the growing resistance to control from Brussels. Member states from Sweden to Greece to Hungary already blame the EU for saddling the confederation with 1 million refugees from Syria and other war-torn countries. And euroskeptic parties and governments increasingly view the euro as an economic failure. Since 2010, the GDP of the 28-member EU has grown a total of just 5.2%, and the 19-nation eurozone expanded at just over half that rate, badly lagging the U.S. (12%), Australia (14.5%), and Canada (9.3%).
European governments are already resisting Brussels as never before. In France, Marine Le Pen of the anti-immigration National Front is calling for a French exit, or “Frexit,” referendum (memorably billing herself “Madame Frexit”). In December, voters in Denmark rejected closer legal ties with the EU. In Finland, a sizable 53,000 citizens signed a petition demanding their own referendum on EU membership. And in Hungary, Prime Minister Viktor Orbán proposed a referendum on the refugee policy, which he claims allows “gangs to prey on Hungarian women.” Britain’s vote will stress-test the EU’s political endurance, says Jonathan Portes of the National Institute of Economic and Social Research. “If Brexit wins, we can count on a lot more referendums,” he says.
To be sure, Britain is a special case; it has long been pondering an exit because its trade is less dependent on the EU than France’s and Italy’s, and it tilts far more toward free-market policies. But the mechanics of the euro guarantee escalating tension: The single currency makes the exports of weaker countries artificially expensive (and those of Germany excessively cheap), putting their economies at a crippling disadvantage. In strong countries discontent is growing too. “A worker on the Cologne metro thinks about one thing vis-à-vis Europe,” says economist Roger Bootle, chief of Capital Economics. “And that’s not paying so that the Greeks, who have a different view of work and taxes, can retire way before he can retire.”
If Cameron and the EU lose the Brexit vote or even if they narrowly win, the day when Europe’s business leaders and mainstream voters turn against the euro could advance from a remote possibility to a looming threat.
For more on this topic, read “Global Business Really, Really Hates the Brexit.”
A version of this article appears in the June 1, 2016 issue of Fortune with the headline “The European Union is in Big Trouble.”